– Dr. Andrew Griffith, Assistant Professor, Department of Agricultural and Resource Economics, University of Tennessee
FED CATTLE: Fed cattle traded $1 lower than last week on a live basis. Prices on a live basis were mainly $108 to $109 while dressed prices ranged from $170 to $174.
The 5-area weighted average prices thru Thursday were $109.08 live, down $0.44 from last week and $172.82 dressed, down $0.34 from a week ago. A year ago prices were $106.78 live and $169.74 dressed.
Cattle feeders are seeing red on closeouts when calculating on a cash to cash basis. However, many of these cattle would have been hedged which means many cattle feeders are making a modest return. The one bright spot is that prices are much higher today than they were one year ago. However, downside price risk will continue into the fall months before finding fundamental support at the end of the year. It would appear cattle feeders are betting on the come in the market based on strong cash feeder cattle prices. In other words, cattle feeders are paying lofty prices for feeder cattle today which means they are counting on the market to increase significantly in the next five or six months.
BEEF CUTOUT: At midday Friday, the Choice cutout was $213.20 down $1.17 from Thursday and up $1.90 from last Fri-day. The Select cutout was $202.87 down $1.12 from Thursday and up $1.18 from last Friday. The Choice Select spread was $10.33 compared to $9.61 a week ago. One year ago the composite Choice boxed beef price was in the midst of trading in the $191 to $193 range for five consecutive weeks. Choice boxes then traded just shy of $213 before ending the year near $202. Late summer and early fall months are known for softness in the beef market. Those months are then followed by the late year holiday market that provides support just prior to the winter market where consumers move from Choice grade middle meats to end cuts. Looking at this market from a historical perspective would suggest there continues to be downside price risk in the beef cutout. The beef market had been on trajectory of lower prices since the spring price peak, but the past three weeks have displayed price support. This price support is primarily due to Labor Day purchasing, but restocking of shelves will soon be completed. This means wholesale beef prices are likely moving lower during September and October. Packers will likely attempt to manipulate production to maintain strong prices unless the bottom falls out of finished cattle.
OUTLOOK: As the month of August winds down, most producers and speculators in the feeder cattle arena will turn their attention to the September, October and November contracts. At this point, it does not matter which contract is being viewed as all three months are trading in about a 50 cent range. Thus, based on futures contracts and traders of futures contracts, the market price is not expected to be any different in November than it is today. This singular piece of information provides pricing opportunities for cattle intended for fall marketing. How this information is used can lead to several different outcomes as it relates to the price received for fall cattle marketings and ultimately profitability. Though futures are showing no price changes between now and November, the seasonal tendency is for calf and feeder cattle prices to decline. Based on Tennessee price data, 500 to 600 pound steer prices decline five percent on average from August to November which would result in prices declining about $7 per hundredweight in today’s market which equates to about $40 per head. Similarly, 700 to 800 pound steer prices decline six percent on average from August to November which would mean nearly an $8 per hundredweight decline in prices over the next few months. Given that feeder cattle futures are not pricing in any price decline over the next three months and the seasonal tendency is for cattle prices to decline, producers have a decision to make on market pricing. Most producers will ride the market out until time of marketing which will likely result in receiving a lower price if the seasonal tendency holds. Other producers may take advantage of today’s market price and either hedge fourth quarter marketings or sell cattle using a forward contract with an October or November delivery. The risk that remains is the potential for prices to move higher, but the likelihood of prices moving higher is relatively small.
The August cattle on feed report for feedlots with a 1000 head or more capacity indicated cattle and calves on feed as of Au-gust 1, 2018 totaled 11.09 million head, up 4.6% compared to a year ago, with the pre-report estimate average expecting an increase of 4.4%. July placements in feedlots totaled 1.74 mil-lion head, up 7.9% from a year ago with the pre-report estimate average expecting placements up 5.5%. July marketing’s totaled 1.87 million head up 5.0% from 2017 with pre-report estimates expecting marketings up 4.9%. Placements on feed by weight: under 800 pounds up 13.8%, 800 to 999 pounds down 3.2%, and 1000 pounds and over up 13.3%.